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Barclays pays record fine for rate manipulation

MARK COLVIN: LIBOR is one of those acronyms that get thrown around in the finance world, but few of the rest of us know, it stands for London Inter Bank Offered Rate, and finance organisations all over the world use it as their interest rate benchmark.

Now it turns out that at least one big bank has been manipulating the LIBOR in a gigantic swindle.

Barclays - a household name in the UK - has been fined about $450 million for what it did. The bank's employees submitted false figures to change the rate - and in doing so, affected hundreds of trillions of dollars worth of contracts.

Business reporter Michael Janda has more.

MICHAEL JANDA: LIBOR is the interest rate that governs well over $500 trillion worth of financial contracts and when big businesses borrow internationally, LIBOR also often comes into play.

Richard Heaney is the Winthrop Professor of Finance at the University of Western Australia.

RICHARD HEANEY: If I go to borrow money in Europe, than I would borrow at the LIBOR rate, plus a margin.

MICHAEL JANDA: So as the LIBOR rates moves, your interest rate also moves with it?

MICHAEL JANDA: So how is this rate set? By central banks? Governments? By trading on one of the world's major markets? No. It's just a guesstimate by 16 banks and in practice by a few, often young traders inside those banks.

Richard Heaney again.

RICHARD HEANEY: The British Bankers Association goes to lenders and says how much would it cost for them to borrow from each other for 15 different periods, from overnight to one year. And that would be asked in a number of currencies. So they just ask, you know what would you be prepared to trade at?

They then exclude a couple of the extreme quotes and the remaining are averaged and that gives us essentially the rate that applies.

MICHAEL JANDA: That seems open to a lot of manipulation, or to put it even more bluntly, straight-out lying.

RICHARD HEANEY: I think if people were prepared to lie, then that rate could easily be rigged.

MICHAEL JANDA: And so it has been.

Regulators in Britain and the US have fined Barclays a total of about $450 million for sending in misleading estimates of its borrowing costs in an attempt to artificially raise or lower the LIBOR rate.

Often this was done at the request of derivatives traders who stood to gain by such moves.

In one case, a trader at another bank who stood to lose a lot of money unless LIBOR fell, emailed a friend at Barclays.

TRADER EMAIL (voiceover): If it comes in unchanged, I'm a dead man.

MICHAEL JANDA: Sure enough, Barclays three-month US dollar LIBOR submission was lower that day than the day before. And all it cost was some good will and French champagne.

TRADER EMAIL (voiceover): Dude, I owe you big time. Come over one day after work and I'm opening a bottle of Bollinger.

MICHAEL JANDA: On another day, minutes before the LIBOR submission deadline, another trader also asked for lower rates to be sent in.

TRADER 2 EMAIL (voiceover): If it's not too late, low one-month and three-month would be nice but please feel free to say no. Coffees will be coming your way either way, just to say thank you for your help in the past few weeks.

BARCLAYS EMAIL (voiceover): Done, for you big boy.

MICHAEL JANDA: Britain's Financial Services Authority found evidence of at least 257 such requests over a four-and-a-half year period to June 2009.

The manipulations were often small enough to fly under the regulators' radar - less than a single basis point, or one-hundredth of a per cent. But when billions or even trillions are involved, the profits can add up to many millions.

Richard Heaney again.

RICHARD HEANEY: If that rate can be rigged, then day-to-day movements could be set up so that you're able to profit from them, even though the underlying market hasn't changed at all. So the derivative, you can actually trade in the derivative and make money on artificial movements in the LIBOR.

MICHAEL JANDA: That means the $450 million fine for Barclays could be the tip of the iceberg. It may also face billions of dollars worth of lawsuits from the organisations on the other end of the contracts that lost out because LIBOR was manipulated.

And it wasn't just Barclays. More than a dozen other major investment banks are also in the firing line - not just for making money on the swindle, but for making the banking system itself look healthier than it really was during the peak of the financial crisis.